Understatement penalty in terms of the Tax Administration Act – a critical analysis of the interpretation of a bona fide inadvertent error

• Author: Maryke Wiesener
• DOI: 10.17159/2225-7160/2020/v53a12
• Published date: 01 June 2020
• Date: 01 June 2020
• Pages: 176-187

176 2020 De Jure Law Journal

Understatement penalty in terms of the

Tax Administration Act – a critical analysis

of the interpretation of a

bona fide

inadvertent error

Maryke Wiesener

MCom Taxation, Chartered Accountant (SA)

Lecturer, School of Accountancy, Stellenbosch University

SUMMARY

The Tax Administration Act stipulates that in the instance of an

understatement by the taxpayer, an understatement penalty must be

levied by the South African Revenue Service (SARS) for each shortfall in

relation to each understatement, unless the understatement is due to a

bona fide inadvertent error. The term “bona fide inadvertent error” is only

used in the context of an understatement penalty. This term is, however,

not defined in the Tax Administration Act, any other tax act, or the

Interpretation Act. Initially, when the term was first introduced into the Tax

Admi nis tra tio n Act in 2 013, cer tai n fa ctors that need to be considered in

the context of factual errors and in the case of a legal interpretive error

were listed in the Draft Memorandum on the Objects of the Tax

Administration Laws Amendment Bill of 2013. However, the final version

of the Memorandum on the Objects of the Tax Administration Laws

Amendment Bill of 2013 did not include examples of what would

constitute a bona fide inadvertent error when SARS must consider whether

or not to impose an understatement penalty, but it stated that guidance

will be developed in this regard.

Subsequently, during 2016, judgement was delivered in Income Tax Case

(ITC) 1890 and the court held that a bona fide inadvertent error is “an

innocent misstatement by a taxpayer on his or her return, resulting in an

understatement, while acting in good faith and without the intention to

deceive”. Thereafter, during 2018, SARS issued guidance in respect of the

use of the term “bona fide inadvertent error” in the context of

understatement penalties. SARS concluded that “the only errors that may

fall within the bona fide inadvertent class are typographical mistakes – but

only properly involuntary ones”, and further clarified that a lack of

reasonable care will also not be excused.

There is a conflicting view between the court in ITC 1890 and the guidance

provided by SARS. It is, however, important that clear-cut guidance be

provided regarding what would constitute a “bona fide inadvertent error”,

as this would absolve the taxpayer from an understatement penalty.

How to cite: Wiesener ‘Understatement penalty in terms of the Tax Administration Act – a critical analysis of

the interpretation of a bona fide inadvertent error’ 2020 De Jure Law Journal 176-187

http://dx.doi.org/10.17159/2225-7160/2020/v53a12